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Watch full video ↗The VXX's price is negatively impacted by the basis difference between the front-month and next-month VX futures. By shorting the VXX, traders can profit from the drag caused by rolling from the cheaper front-month future to the more expensive next-month future. This strategy is effective when the basis is positive, as the rolling process erodes the value of the VXX.
The speaker suggests that when the VIX futures are in contango, the front-month futures tend to spike higher and faster than the back-month futures. This dynamic allows for bullish trades in the June VIX futures options, such as short put spreads or long call spreads. The strategy relies on the expectation that the front-month futures will outperform the back-month futures in volatility spikes.
The speaker suggests using a call spread strategy for long volatility, emphasizing the need to define risk and avoid naked short positions. The strategy involves trading VIX futures options before considering VXX, as VIX futures are more direct and offer better control over risk. The speaker also notes that VIX futures are priced without arbitrage opportunities and that the VXX is a continuously rolling portfolio of futures, which can lead to drift over time.
The VXX is an ETN that holds a portfolio of VX futures, providing exposure to volatility. It rolls its positions from the front-month future to the next-month future, which creates a drag on its price due to the basis difference between the futures. This rolling process involves selling the cheaper front-month future and buying the more expensive next-month future, which erodes the value of the VXX over time. The basis difference, such as the $1.75 difference between June and July futures, is a key factor in the performance of the VXX.
The speaker explains that the VIX futures are typically in contango, where the back-month futures trade higher than the front-month futures. This creates a drag on the VXX, which is a leveraged volatility index. The speaker advises against buying VXX for speculative purposes due to this contango, as it results in a cost for the VXX. The VXX performs better when the VIX futures are in backwardation, which is rare and usually occurs during market crashes.
When speculating on long volatility, the speaker suggests starting with VIX futures options before considering VXX. The rationale is that VIX futures are more direct and offer better control over risk compared to the VXX, which is a portfolio of futures that continuously rolls over. The speaker emphasizes the importance of using defined risk strategies and avoiding naked short positions due to the potential for large market movements that could wipe out a short position.
The VXX is an ETN that holds a portfolio of VX futures, providing exposure to volatility. It rolls its positions from the front-month future to the next-month future, which creates a drag on its price due to the basis difference between the futures.
TakeawayThe VXX's performance is influenced by the basis difference between the front-month and next-month VX futures.
The basis between VIX futures refers to the difference in price between the front-month and back-month futures. The speaker mentions that the average basis is about $1.75, with the back-month futures trading higher than the front-month futures, indicating contango.
TakeawayThe basis between VIX futures is typically around $1.75, with the back-month futures trading higher, indicating a contango structure.
Trading VIX futures involves significant risks, including the potential for large market movements that could lead to substantial losses. The speaker warns against naked short positions due to the possibility of volatility spikes, which could wipe out a short position. Additionally, VIX futures are large products with a high cost per point, requiring careful risk management.
TakeawayUse defined risk strategies and avoid naked short positions when trading VIX futures.